Will Apple, Foxconn, & Sweeteners Satisfy Labor Activists?

Foxconn Electronics Inc. is either one of the most loyal corporate partners in the electronics manufacturing community or a patsy for its biggest customer, Apple Inc. (Nasdaq: AAPL)

Before you charge me with being too harsh on the world's No. 1 electronics manufacturing services provider, consider two recent developments. First, early this week, the Fair Labor Association began auditing Foxconn factories in Shenzhen and Chengdu, China, under instructions from Apple, which faces a barrage of accusations of condoning labor violations at plants that make its products. Apple said the audits were "voluntary." That implies Foxconn readily and willingly allowed FLA workers to turn the floodlights on its operations.

"Apple's suppliers have pledged full cooperation with the FLA, offering unrestricted access to their operations," Apple said when it announced the beginning of the inspections. CEO Tim Cook had this to say:

We believe that workers everywhere have the right to a safe and fair work environment, which is why we’ve asked the FLA to independently assess the performance of our largest suppliers. The inspections now underway are unprecedented in the electronics industry, both in scale and scope, and we appreciate the FLA agreeing to take the unusual step of identifying the factories in their reports.

I don't accept the notion that Foxconn cheerily invited the scrutiny. Few companies would ever do this. Granting such access inevitably turns up something, no matter how spotless a manufacturing facility might be. Foxconn agreed under pressure. Apple is by far its biggest customer and helped propel it to the top of the EMS rankings. The idea of turning down such a request from Apple is laughable. Apple needed to deflect complaints from workers' rights advocates and an intensely inquisitive press, and this move ensured that any blame would be placed squarely on Foxconn's doorstep.

That's the first evidence that Foxconn is willing to take a blow for Apple. But Foxconn is going further to burnish its own reputation and stop those who want to use it as a cudgel against Apple. Today, it announced that salaries for workers making iPhones and iPads in China will go up 16-25 percent starting in February. This will be the third hike in just under two years, according to a Reuters report. Junior-level worker salaries could rise to 2,200 yuan (about $350) per month from as low as 900 yuan three years ago.

Such a hike is incredible and probably unprecedented in manufacturing. Somehow, though, Foxconn is able to swing it without necessarily pushing the cost back to Apple in a business with extremely thin margins. Either Foxconn was overcharging Apple before, or it can now absorb the extra costs without disappointing investors. Whatever the case might be, iPhone, iPad, and iPod prices are unlikely to increase at a double-digit rate to offset the additional costs.

I want to return to the question at the top of this page. Will these steps taken by Apple and Foxconn satisfy their critics? Probably not, and this won't be because the actions are not commendable. They are. What may detract from the effectiveness of these moves are issues such as the timing and the controversial role the FLA is playing.

Two days after the FLA supposedly began its review of the Foxconn facilities, its president, Auret van Heerden, set off a firestorm of criticism by telling Reuters the EMS provider's plants are "first-class." Apple critics have seized on this statement to claim that it selected an organization already seen as partial to businesses to audit its suppliers. However one looks at it, Apple and Foxconn still have much to do to convince folks their operations are above board.

In a subsequent blog, I will write about what Apple's actions mean for other electronics and high-tech OEMs and their extended supply chain.

Nemos, I must admit that I didn't quite understand the reason Stephen Elop advanced for moving Nokia's manufacturing to Asia. It was more on the line of "everybody did it so we should." The rest of the industry began this outsourcing more than a decade ago and it is more or less fully advanced. The problem Nokia faced was more than just manufacturing or cost. It was related to consumer acceptance of a rival's product. The shift of manufacturing to Asia won't resolve this.

Stochastic, Henry Ford manufactured primarily for the American consumer. As a local manufacturer it made sense to include his employees in the classification of potential customers, hence paying them well enough to purchase Ford cars. Plus, Ford was not alone in paying workers well. The rest of the economy was booming and if Ford needed the employees it had to be prepared to pay them well or they might walk over to a rival, whether this be in automotive or machinery or whatever.

In the case of Apple, the company didn't see China as a potential market for quite a while. It's been many years since it started selling the iPhone and Chinese telecom companies are only now getting their hands on the device. Apple's calculation might be different, though. With more than 1.3 billion people, China represents the biggest potential market for Apple products but knowing the limited purchasing power -- compared with consumers in the West -- the company probably didn't try so hard to cultivate the market.

Still, even one-tenth of this market represents a huge opportunity for Apple. That's why it is making a play for them now but it doesn't have to help cultivate this customer base. It can simply sell to the newly rich in China. Paying its Chinese workers enough to be able to buy the Mac, iPhone, iPod and iPad might just be too expensive for Apple. It might dig into its sweet margins.

rohscompliant, If Apple is behind the pay increase at Foxconn (and if it is absorbing the extra cost) this will eventually show up in its cost of goods sold. The company can't just hide this. It may show up in lower gross profit margins or operating margins. As a public company Apple may even have to disclose this if the increase is material. Analysts will eventually pick up on this and ask the company about the impact of Foxconn's wage increase on Apple.

As you noted, however, the company has the resources to easily make the added costs look like peanut. With the amount of free cash flow it is generating and the current rate of sales growth, Apple isn't being endangered by the additional cost. Things may look different if it has to pass the extra cost to customers but we wouldn't expect this to hit Apple alone since the rivals patronize the same contract manufacturer.

Nemos, Yes. CEOs take decisions based on what they believe is in the best interest of their company and not what they believe is right for the entire world or even for the employees. It's all about shareholder value. If the entire world goes down the drain later they would still insist they did the right thing. That's why it's capitalism and not communism/socialism. Unfortunately, this winner takes all approach ends up hurting someone or everyone but the impact is never the same.

Based on Apple's earnings and record profits; it is a fair bet that Apple is 'kicking' $$ back to Foxconn to pay for worker wage increases. This will probably never see the light of day but it makes perfect sense...............it is an infinitesimal amount of $$ Apple would pay based on the fact that they are sitting on more cash than any other company in the world..........wont be able to prove it but that would be my guess.

Stochastic, "A fair deal?" Whose job is it to determine the "fair deal" and would we all agree on what's a fair or not fair deal? I don't know any employee that says "the company is paying me enough". Everyone wants more, always, and so the Chinese workers will probably be asking "more" soon.

By moving to the core of the industry and offerings services that keep the system humming, a group within the electronics market has rendered irrelevant the question of ownership and control of the supply chain.

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